Abstract

Do financial markets reward investors for bearing risk? My paper tests this basic paradigm question with a quasi-experimental approach. After a firm has publicly declared a dividend, but in the few days that precede the cum-to-ex date, an investor in the traded equity owns a claim to the dividend cash plus the remaining firm equity within the corporate shell. In the days after the cum-to-ex date, the shell contains only the sans-dividend-cash firm equity. The empirical evidence confirms the predicted increases in volatilities but shows unexpected decreases in average returns. Taxes and trading cannot explain this.

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